The five key elements that undergird FY25 interim budget

The interim Budget for 2024-25 has received widespread praise for its fiscal prudence.

As the initial buzz around the 2024-25 interim budget settles, it's important to zoom out and take a holistic view of the government's fiscal strategy and focus. In this context, the five key elements that define the interim budget are as follows:

Realistic nominal GDP

The interim budget has assumed that the economy will grow by 10.5 percent on a nominal basis. For two years in a row, the government has kept the nominal GDP growth assumption below 11 percent. This is less than the median nominal GDP growth assumption of 11.8 percent for the last 15 years. This does not indicate any pessimism on the government's part. In fact, there is now an expectation that the quality of nominal economic activity will be well balanced, with real growth being close to its medium-term trend (6.5-7.0 percent), and inflation gravitating close to its 4 percent target, highlighting policymakers' emphasis on durable growth.

Also, the government is realistic about its assumption of nominal economic activity. Since this has a bearing on tax buoyancy and expenditure requirements, it is likely to enhance fiscal marksmanship, and thereby fiscal credibility.

Fiscal policy pivot

Even as market participants are intensely focused on the likelihood of a monetary policy pivot in 2024 after an accelerated pace of record tightening during 2022 and 2023 by key central banks, including the RBI, India's fiscal policy is making a discreet pivot. The interim budget has pegged the revenue deficit at 2.0 percent of GDP, which is not merely better than pre-Covid levels (2018-19 saw a revenue deficit of 2.4 percent), but also the lowest revenue deficit since the 2008 global financial crisis (1.1 percent in 2007-08). Structural improvement in tax buoyancy and compliance, marginal support from non-tax revenue, and a gradual tapering of the post-pandemic stimulus is behind this shift.

Quantity vs quality of expenditure

The central government's total expenditure (budgetary allocation, including the resources of public sector enterprises) is normalising. From 15.5 percent of GDP pre-Covid (2018-19), it jumped sharply to 20.1 percent in 2020-21, and is slated to moderate to 15.6 percent of GDP in 2024-25. However, there's an important shift in the quality of expenditure. The ratio of total capex to total revenue expenditure, by both the central government and PSEs, has been improving and is budgeted to touch 39.8 percent in 2024-25, up from an average of around 33 percent in the previous three years.

Capex and rural spending

In 2018-19, the central government's rural spending and capex (excluding rural capex) stood at 1.3 percent and 1.6 percent of GDP, respectively. Over 2020-21 and 2021-22, both rural spending and capex were scaled up to support the economy following Covid. Since then, while the government has been gradually trying to normalise rural spending, which is budgeted at a five-year low of 1.7 percent of GDP in 2024-25, it has doubled down on capex (excluding rural capex), which is budgeted to touch a 20-year high of 3.3 percent of GDP in 2024-25.

It would be naïve to conclude that the government is de-emphasising rural spending vis-à-vis capex. There are profound linkages between hard infrastructure spending and rural income generation. Further, the government has been steadfast in prioritising rural empowerment (through various targeted schemes like Lakhpati Didi, PM Grameen Awas Yojana, the rooftop solar programme, etc.) over entitlement.

Maturity in handling maturities

Government bonds worth Rs 3.61 lakh crore are scheduled to mature in 2024-25. The government has decided to retire Rs 1.24 lakh crore worth of bonds by taking recourse to the GST compensation fund, which is budgeted to see an allocation of Rs 1.53 lakh crore in 2024-25. Since there is no compensation bond up for maturity in 2024-25, this will help utilise idle resources and bring down the gross borrowing requirement, which is slated to moderate to a three-year low of Rs 14.13 lakh crore in 2024-25 (significantly lower than the market consensus expectation of Rs 15.4 lakh crore). This would lower the cost of credit and benefit both households and corporates.

Fiscal consolidation

To have the fiscal flexibility to effectively respond to emerging economic challenges, the government has not been meeting the erstwhile FRBM (Fiscal Responsibility and Budget Management) guidelines, which remain inapplicable since the global financial crisis. However, in line with the commitment made in the budget speech of 2021-22, the government has indicated that it would pursue a broad path of consolidation by guiding the fiscal deficit lower towards 4.5 percent of GDP by 2025-26.

Also Read: FM sets FY25 fiscal deficit target at 5.1%, goes aggressive on consolidation

One can empathise with the government's gradual withdrawal of post-Covid fiscal accommodation to smoothen out the weaning off process. However, it is also important to codify budgetary discipline and reframe the FRBM (with room for exit), considering the current and expected economic realities. The full budget, to be presented later in June-July 2024, could provide greater clarity on this. This would bolster fiscal credibility further and brighten India's chances of making further progress on inclusion in all key global bond indices. As a result, the economy would benefit from the passive inflow of foreign investment in Indian debt, which in turn would free up resources for domestic credit.

Shubhada Rao is Founder, QuantEco, and Vivek Kumar is Co-Head Research, QuantEco. Views are personal, and do not represent the stand of this publication.